Rahul purchases only 2 goods: ice cream and chocolates. If own price elasticity
of demand for chocolates is 1, what is the cross price elasticity of demand for
ice creams? Show your calculation/reasoning.
Answers
Explanation:
cross elasticity of demand for ice cream with respect to the price of chocolate sauce equals the percentage change in the quantity of ice cream demanded divided by the percentage change in the price of chocolate sauce. Using the data in the problem, the cross elasticity of demand equals (15 percent)/(−5 percent), which is −3.0. Ice cream and chocolate sauce are complements. 25. After you have studied Economics in the Newson pp. 98–99, answer the following questions. a. Looking at Fig. 1 on p. 99, explain what must have happened in 2014 to the supply of coffee. The price of coffee soared in 2014, which indicates that the supply of coffee decreased. b. Given the information in Fig. 1 and the estimated elasticity of demand for coffee, by what percentage did the quantity of coffee change in 2014 and in which direction? The price of coffee rose from $1.00 per pound to $1.60 per pound. Therefore the percentage increase in the price of coffee is ($1.60 –$1.00)/$1.30 = 46 percent. The price elasticity of demand is 0.26. Therefore the quantity of coffee decreased by 0.26 ×46 percent, which is 12 percent.
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Solutions Economics E201-Fall 2015, Weekly Assignment 5 Page 5 of 14 c. The news article says that farmers’ revenue shrank as the price of coffee fell. Explain why this fact tells us that the demand for coffee is inelastic. The total revenue test shows that total revenue falls when the price falls only if the demand for the product is inelastic. Therefore, because farmers’ total revenue from coffee fell when the price of coffee fell, the total revenue test means that the demand for coffee must be inelastic. d. How does the total revenue test work for a rise in the price? What do you predict happened to total revenue in 2014? Why? If the demand for a product is inelastic and the price rises, the total revenue increases. Therefore, in 2014 when the price of coffee rose, coffee farmers’ total revenue increased.e. Coffee isn’t just coffee. It comes in different varieties, the main two being Arabica and Robusta. Would you expect the elasticity of demand for Arabica to be the same as the elasticity of demand for coffee? Explain why or why not. There are more close substitutes for the specific type of coffee, Arabica, than there are for coffee in general, so the price elasticity of demand for Arabica is larger than the price elasticity of demand for coffee. Chapter 5, Review Quiz—page 107, questions 1, 2, 3, and 4 Page 107
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